Tell The Truth: This Is A Woman's World...

February 16, 2009

He's Your Guy, When Stocks Are High

For more than a week, I've been sitting on this post, hoping, in vain, that someone would provide the insights into the "bank rescue" plans of the Obama Administration. After stalling a day - ostensibly to "settle the stimulus bill" - Tim Geithner offered an explanation of his "plan" that left more questions than answers, and caused the latest wave of downward movement in the stock markets (where, I'd point out, people continue to suggest "we've found the bottom" shortly before another cataclysmic drop... does anyone understand that there's a pattern here?). Geithner's proposal, it seems clear, will not be enough... and that should not reassure anyone putting their faith in Obama's "foreclosure proposal" that arrives later this week - which so far appaears to be a $50 billion promise to rewrite some bad loans... and won't nearly address the problems at that size.

As our conversations - about the stimulus plan, the banking crisis, and our economy more generally - get more heated and less productive (I can't decide whether the conversation out of my Saturday post leaves me thrilled or terrified at the passions its provoked), I think reality is setting in, finally. And the reality is worse than many people want to face, and as bad as I've been suspecting all along.

Red asked over at her new place, a few weeks back, if we could finally have a serious conversation about nationalizing banks. The answer, I think, was pretty clear and has gotten clearer: no, we can't. Aside from the fact that - as I have to patiently explain to my Mom, too - we are not Sweden (it's the herring, I think, that's a deal breaker, not the social policies), we can't nationalize the banks because we lack the structure and the vision to make it so... and also because, that's not exactly our problem, just now.

Should we nationalize? I'd say no, still; not because it might not stave off some painful realities... but because I'm not sure we don't deserve pain. All the flailing around of the past few months - culminating in the horrendous stimulus bill and what I'd guess is our last attempt to "save" the banks - has been attempting to deny the obvious... and I'm inclined, out of it to finally say "let it come."

One of the basic problems about our crisis is how little, still, people fully comprehend our crisis - the mortgage mess, which is lately described as a banking crisis, is really about basic supply and demand. Artificial levels of demand pushed up the prices of homes until they were unsustainable. Once that bubble burst, we were left a huge number of overvalued homes. The question, which no one can seem to answer, is how to accept the lowering of the base value of many homes. There are a few basic options:

You could rewrite mortgages - this has been floating as an idea, but mainly people have been fiddling on the margins - trying to lower interest rates, or write in extensions to lower payments... but few loans have been rewritten at a simply lower value. That's the real bath the banks would have to take to solve the crisis, because the bonds that back the mortgages would be worth less, and easily valued, if we knew what the homes underlying them were worth. Or at least admitted it.

You could take the bad debt away from the banks. This is the "bad bank" solution, often poorly explained, that's been floating for weeks - in this scenario, using some mechanism (transfers, warrants, or outright purchase of bad debt), one or more "bad banks," consisting mainly of failing debt instruments, would absorb the failures of the big banks, allowing them to reclaim solvency. Of course, the problem with this proposal is, er, the bad bank, and the logjam of bad assets it would hold.

You could pretend we don't have a problem. Banks continue to push for a change to "mark to market" rules for their bad debt - this is the requirement that bank balance sheets account for the value of distressed assets at a value which corresponds to what they would fetch, if sold, on the open market right now. Banks would like to choose alternative approaches to defining value... which are helpfully called "mark to myth." This is the theory that one day, in the vaguely unspecified future, what now looks like bad debt will one day be wonderful, profitable debt. It's a theory, you have to admit.

Or, You could increase foreclosure. We talk about a "foreclosure crisis", and try to avoid it... but one thing to keep in mind is that foreclosure works, economically - writing off the current loan, revaluing the home at a lower price... this is what we need. And while we don't like, on an emotional level and as a matter of social policy, the idea of throwing people out of homes they can't afford... we're tending to miss the obvious. When people can't afford their mortgages, in that situation, the thing to do is... stop pretending that they can.

The argument, I think, comes down to whether we'd like to do #1, or #4. The problem with #2 and #3 is that addressing the debt holding problem of big banks is still not dealing with the real crisis. The bad bonds remain bad bonds as long as no one can feel confident that the mortgages backing them up are in flux. And with Summers and Geithner ready to announce some variation of #2... it's pretty clear we're just delaying the inevitable. Again.

One of the least understood elements of how we got here is how perverse the mortgage market became in the past few years. When banks held mortgages, rather than selling them, the risk to the bank was clear: it was in the banks interest, in order to see a major loan get paid back, to work with homeowners in crisis. Now, with "mortgage servicers", you have a situation where the people managing a loan have little connection to their lendees, or the community. And lacking connections, they make decisions about loans with less of an eye to keeping a loan performing. Hence, increased foreclosures, even when they're not necessarily the right next step.

Bank "nationalization" too is not the next right step. I think we're reaching a point where the whole thing has lost any meaning, because frankly, like the bad mortgages that are failing faster and faster, so are the banks that wrote them. Since the new year there have been 13 banks taken over by the FDIC; that's on top of dozens of banks taken over last year. We have no realistic mechanism to take over all of the banks (the FDIC, one whispers softly, doesn't have the money to do it), and we really have no guide to how that would work.

The much touted "Sweden or Japan" choice of dealing with our banking crisis is a false one: both Sweden and Japan, like Iceland, are probably better understood as the warning bells for the problem we have internationally, not as examples that show how we could repond. We have a world wide problem because unlike those three countries, we are not nearly as closed states (with mainly internal banking systems) as they are (Sweden, few realize, sits farther outside the European Union than most of Europe, by choice - they've never adopted the Euro, or the financial requirements associated with it). We may very well "nationalize" some banks in the sense that bank failures will force us to step in to many, many banks in the next two years... but overall, the banking system will remain a private enterprise. As it should.

The banking crisis, in many ways, has refused to conform to the traditional American definition of a problem - find the party that did wrong, and blame them, and punish them. We're trying, now, to blame bankers, because blaming homeowners didn't work out, nor did blaming government and poor regulation. From the complaints about bonuses, to the scandal of John Thain's office renovation, there's certainly a lot to pick and choose to animate the case against them.

As emotionally satisfying as it may be, though, bankers won't make a useful scapegoat; we need a banking system, and we need, unfortunately, to work through the problems of the bank system we have, not some notion that we could, say, "nationalize" our problems away. I had hoped that the Obama Administration's best shift from the Bush folks would be not so much policy oriented as performance oriented: explain better to people why we have to do the stuff that seems like rewarding failure. Unfortunately, I think, Geithner and Summers are continuing the Paulson approach of knowing what's best, and not explaining it well (its why, I suspect, rather than Sanjay Gupta, Obama needs a Suze Orman - someone who can serve as a public face for the financial crisis, with coherent explanations and good advice for everyone).

Until we face up to the hard choice - either rewrite thousands of mortgages, or foreclose on them - we're dancing on the edges of the real nature of the problem we face. We need to get serious about the home ownership problem, because all of our other problems follow from it (indeed, our biggest problem, the lack of affordable housing, follows most obviously from it), and they're getting worse. That, too, is why the stimulus bill is such a bad bill - rather than dive into the two big problems we have (foreclosures and a lack of affordable housing), we're throwing money everywhere but at these two central issues.

And it's why we can't rail against foreclosure in a vacuum; the fight here isn't just to "stop foreclosure" - it's to start rewriting mortgages, and to make some painful economic admissions about the underlying value of homes. As long as activists sell the emotional stories - and admittedly, horrible ones - of people being thrown out of their homes, and soft pedal the hard economic realities of what needs to happen, we'll get nowhere. There's real pain to rewriting mortgages, as an alternative to forelcosure. And we have to face it, not hide from it. These are the choices. And so far, the Obama Administration, like its predecessor... won't make them.